Green taxation: incentives and penalties in the ESG context

Have you ever stopped to think that taxation can become a great ally of sustainability and strengthen your ESG results? Well, the answer to that question lies in green taxation, which, in short, is the intelligent and well-allocated use of fiscal instruments to reward agents who invest in sustainable practices, while also penalizing those who generate severe and harmful environmental impacts.

In this article, I intend to briefly show how Brazil has articulated these tools (extra-fiscal taxes, sectoral charges, tax benefits, etc.) and how there is still room for constant and significant improvement.

Green taxation and why it matters.

As is well known in all spheres of society, over the past few years environmental issues have gained ground and – thankfully! – have ceased to be a marginalized topic, becoming one of the central axes of public policies, corporate governance strategies and even tax law.

As never before, issues related to climate change, environmental degradation, scarcity of natural resources, and pollution have gained prominence and demanded regulatory and fiscal responses. Therefore, taxation emerges as a way to encourage sustainable behaviors by rewarding positive practices and penalizing negative and harmful ones.

The concept of green taxation gained even more prominence with the approval of the Tax Reform (EC 123/2023), which introduced the possibility of creating a Selective Tax to be levied on goods and services that are harmful to health and the environment as a whole. This adds to the existing tax incentives (such as the Green Property Tax and the Ecological ICMS), forming a set of regulatory instruments capable of consolidating environmental taxation as a vector of environmental public policies, based on the idea of the polluter-pays principle, which is provided for in the Brazilian legal system and in several international treaties.

It so happens that, even before the approval of the Tax Reform (Constitutional Amendment 123/2023), the 1988 Constitution of the Federative Republic of Brazil already provided ample support for this type of policy, through articles such as Article 225 and Article 170, which respectively foresee the right of all to an ecologically balanced environment, imposing on the Public Authorities and the community the duty to defend it, and the defense of the environment as one of its principles, when regulating the economic order. Clearly, these articles legitimize environmental extra-fiscality, that is, they legitimize the use of taxes not only for revenue collection purposes, but also to induce behaviors aligned with sustainability.

In the international context, green taxation is also being actively employed. In the European Union, for example, there are several taxes on trade systems and various tax incentive policies for green technologies. Excellent, isn't it?

Much more than a sound legal instrument, green taxation is also linked to companies' ESG strategies. To put it simply: when a company is responsible for pollution, the environmental costs fall on the entire community. However, when a selective tax is established to tax polluting activity, by transferring this cost to the agent causing the pollution, the State corrects market failures. In this context of the private sector, investors begin to demand transparent reports from companies regarding their environmental impacts. Thus, companies seek to comply, avoiding commercial risks and gaining advantages, such as access to green financing lines. It's an extremely positive chain reaction.

Tax penalties: correcting externalities

Although not limited to the application of tax penalties, this is the most visible and prominent aspect of green taxation. These penalties act as instruments aimed at making the practice of polluting activities and/or production that entails any type of high environmental impact more costly and less unfeasible. Examples that deserve highlighting in Brazil include: the Selective Tax, the CIDE-Fuels tax, and the Environmental Control and Inspection Fee (TCFA).

The first of this large group, the Selective Tax, as mentioned above, is a major innovation stemming from the Tax Reform, whose function is precisely to impact goods and services that are harmful to health or the environment. This tax has not yet been regulated by specific complementary law, but it has great potential, possibly discouraging consumption and the spread and application of technological innovation in the search for alternative paths.

In contrast to the tax that still depends on regulation, the CIDE-Combustíveis (Fuel Tax) has been operating in a consolidated manner in the country since the early 2000s, acting as a form of intervention in the economic domain, by being levied on the import and sale of petroleum derivatives, natural gas, and fuel alcohol.

Finally, the TCFA also operates as a relevant instrument, foreseen in the National Environmental Policy Law. This fee has a specific and not generic character, linked to the exercise of environmental policing power by IBAMA, which applies it to potentially polluting companies, with a view to financing the inspection activity.

These are some examples of penalties that play a corrective and educational role, demonstrating how the tax system can be used as an environmental policy tool, aligning private incentives with the social costs of polluting activities.

Tax incentives: rewarding the transition

On another front, the State works to reward positive behaviors through environmental tax incentives. These can occur through reduced tax rates, exemptions, presumed credits, or differentiated revenue sharing. Currently, the best-known examples are the Ecological ICMS (a state sales tax), the Green IPTU (a property tax), and favorable IPVA (vehicle property tax) regimes.

The first tax incentive consists of redistributing part of the ICMS (Value-Added Tax on Goods and Services) revenue according to environmental criteria, ensuring that municipalities with conservation areas, water supply sources, or basic sanitation policies receive a larger share of state revenue. Following the same rationale, the "Green IPTU" (Property Tax) aims to grant discounts on property tax to owners who adopt sustainable solutions, such as solar energy capture, water reuse, green roofs, or composting systems. Similarly, some Brazilian states have granted an exemption or reduction in the IPVA (Vehicle Property Tax) rate for electric and hybrid vehicles.

All these reward instruments seek to demonstrate that the State does not act solely on the front of punitive green taxation, but also through rewarding good practices, which implies a logic that represents concrete opportunities for tax planning, provided they are integrated into effective sustainability projects within the ESG context.

All these instruments aim to align with the growing trend towards a truly sustainable future, and it is at this point that the direct connection with the concept of ESG arises, since tax incentives and penalties have repercussions not only on the economic sphere, but also on how companies structure their environmental, social, and governance strategies.

Green taxation as a structuring axis of the ESG agenda.

It is evident that the connection between green taxation and the sustainability agenda is no longer rhetorical, but practical, considering the tax incentives and penalties currently applicable, and all of this directly influences how companies structure their investment and growth plans. In this way, the ESG (Environmental, Social and Governance) agenda has guided companies, governments, and investors on a global scale and served as a metric for risks and opportunities.

In the environmental field, the connection is clear, as green taxes function as mechanisms that internalize environmental externalities, shifting the cost from the collective to the agent causing the degradation. This makes taxation a way of evaluating the environmental performance of companies, rather than just a public policy.

Equally important, green taxation plays a role in the social pillar, transforming itself into a policy for the equitable distribution of opportunities and quality of life. An example of this is that tax incentives aimed at renewable energy or electric vehicles reduce inequalities in access to clean technologies and create opportunities for productive inclusion.

In terms of governance, green taxation is also essential, as companies that address environmental tax compliance strategically demonstrate administrative robustness, transparency, and accountability—attributes increasingly valued by institutional investors and regulatory bodies.

Furthermore, taxation also serves as a sustainability metric and a parameter for allocating resources in national and international investment funds. This is because companies that demonstrate adherence to good environmental and tax practices are better able to raise financing, issue incentivized debentures, and participate in green credit programs. Clearly, this directly impacts the potential growth of companies, leading them to pay even closer attention to the need for any changes to achieve greater compliance with the ESG agenda.

It can be concluded, therefore, that green taxation is more than a fiscal technique: it is a strategic instrument for transformation, integrating the 3 pillars of ESG by protecting the environment, distributing social opportunities and strengthening corporate governance.

It has also been shown that, when well-designed, this type of taxation can align revenue collection efficiency, distributive justice, and environmental preservation, reducing regulatory risks and increasing business competitiveness.

This set of factors demonstrates that green taxation can no longer be interpreted as a peripheral topic of tax law, because it represents a common language between the State, the market, and society, translating into incentives, penalties, and governance structures that directly shape how companies create value.

It is therefore clear that the true function of green taxation is not to increase or reduce the tax burden in isolation, but to reorient behaviors towards a more balanced and responsible economic development for lawyers, public managers, and companies. The message is very clear: understanding and incorporating green taxation into your strategies is not only advisable, but indispensable for thriving in a regulatory and market environment increasingly driven by sustainability!

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Green taxation and why it matters.

Tax penalties: correcting externalities

Tax incentives: rewarding the transition

Green taxation as a structuring axis of the ESG agenda.

Read more: Challenges of coexistence between CBS, IBS and Selective Tax in the new National Tax System

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